SHOO

Business Context and Reporting Period

Company: STEVEN MADDEN, LTD.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: The Company designs, markets, and distributes footwear and accessories under various brands including Steve Madden, l.e.i., Steven, and Stevies. Operations are divided into Wholesale and Retail segments, with significant reliance on overseas manufacturing.

Key Financial Metrics (Six Months Ended June 30, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 6% ($9.7 million) year-over-year, driven by a 20% increase in the l.e.i. Wholesale Division and a 9% increase in the Steve Madden Women's Wholesale Division.
• Profitability: Net income rose 16% to $10.8 million. Operating income increased 13% to $17.9 million despite a 3% sales decline in the second quarter due to weather and promotional pressures.
• Segment Performance:
  • Wholesale: l.e.i. Footwear operating income surged 73% due to new retail doors and improved margins. Madden Men's sales declined due to a downturn in casual footwear and late spring weather.
  • Retail: Sales increased 6% with the addition of four new stores (total 82 stores). However, comparable store sales decreased 4% for the six-month period and 10% for the quarter due to unseasonably cool and rainy weather in the Northeast.
  • Licensing: Commission and licensing fee income increased 36% to $3.8 million.
• Cash Flow: Net cash used in operating activities was $8.7 million, primarily due to a $13.2 million increase in factored accounts receivable and a $5.8 million increase in inventory.

Outlook, Risks, and Contingencies

• Guidance: The filing does not provide specific numerical guidance for the full year. Management expects to meet financial commitments for the next twelve months based on current liquidity.
• Legal Proceedings:
  • Class Action Litigation: A settlement in principle has been reached regarding securities fraud class actions from 2000; the tentative settlement is within insurance limits.
  • Shareholder Derivative Actions: Agreements in principle have been reached to resolve derivative actions; defense costs are expected to be covered by insurance.
  • Trademark Disputes: Settlements in principle have been reached with Adidas regarding stripe design infringement. A patent infringement suit by Skechers was dismissed in June 2003.
  • SEC Investigation: An ongoing investigation into securities law violations regarding trading prior to June 2000 remains open; ultimate effects cannot be determined.
• Risks:
  • Weather Sensitivity: Unseasonably cool and rainy weather significantly impacted Q2 sales and comparable store performance.
  • Inventory Management: High risk of obsolescence due to fashion trends; excess inventory leads to markdowns.
  • Foreign Manufacturing: Approximately 85% of products are sourced overseas (China, Brazil, Italy, Spain), exposing the company to supply chain disruptions and currency fluctuations.
  • Customer Concentration: Significant portions of wholesale business depend on a few large department store customers.

Investor Verification Checklist

• Inventory Levels: Verify the adequacy of inventory reserves given the $25.3 million inventory balance and the noted softness in the economy.
• Factoring Agreement: Confirm the status of the $15 million credit line with Capital Factors, Inc., noting that $35.4 million is currently due from the factor.
• Legal Settlements: Monitor the final approval and execution of settlements for the class action and derivative lawsuits to ensure no unexpected liabilities arise.
• Retail Expansion: Assess the profitability of the four new retail stores opened in the first half of 2003 against the decline in comparable store sales.
• SEC Investigation: Track updates on the SEC investigation regarding pre-2000 trading activities for potential fines or penalties.